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Question 3 (30 marks) (i) UK based corporation XYZ Inc. just constructed a manufacturing plant in Indonesia. The construction cost 9 billion Rupiah. XYZ Inc

Question 3 (30 marks)

  1. (i) UK based corporation XYZ Inc. just constructed a manufacturing plant in Indonesia. The construction cost 9 billion Rupiah. XYZ Inc intends to leave the plant open for three years. During the three years of operation, cash flows are expected to be 3 billion Rupiah, 3 billion Rupiah, and 2.5 billion Rupiah, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, XYZ expects to sell the plant for 3.5 billion Rupiah. XYZ has a required rate of return of 14.5 percent. It currently takes 8,750 Rupiah to buy one pound, and the Rupiah is expected to appreciate by 3 percent per year. Determine the NPV for this project. Should XYZ Inc. build the plant? What is the impact to NPV in HC and NPV in FC if exchange rate (i) follows parity theorem and (ii) did not follow parity theorem.

(10 marks)

(ii) Carpet Baggers, Inc., is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland.

The forecasted cash flows from the proposed plants are as follows:

C0 C1 C2 C3 C4 C5 C6 IRR

Germany (millions of euros) 60 +10 +15 +15 +20 +20 +20 15.0

Switzerland (millions of Swiss francs) 120 +20 +30 +30 +35 +35 +35 10.7

The spot exchange rate for euros is $1.3/, while the rate for Swiss francs is SFr 1.5/$. The interest rate is 5% in the United States, 4% in Switzerland, and 6% in the euro countries. The financial manager has suggested that, if the cash flows were stated in dollars, a return in excess of 10% would be acceptable. Should the company go ahead with either project? If it must choose between them, which should it take?

(5 marks)

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